What is Angel Investing & How Does It Work?

Dear M&M:

I am having trouble getting funded through my local bank.  I have been told to look into Angel Investing.  I was told I could get the money easier but would no longer have control over my business.  Can you help clarify?

– Ryan

Dear Ryan:

Angel investors generally are a group of individuals or an individual who provides capital for a business startup. Most Angel investors need to meet the Securities Exchange Commission’s (SEC) definition of accredited investors.  They give you money in exchange for equity in your company. The percent of equity can be anywhere from 10% to 50%. There is a risk the investors could fire you if they decide you are not running the business in the best interest.  You will want to read all the fine print before committing to anything.  You will also need a business plan and more than likely will need to make a formal presentation to the investors.

The Small Business Development Center can help you with both the business plan and your presentation.  Remember the investors will want to see a revenue stream. Another attractive venue to raise funds is crowdfunding. According to Wikipedia, “Crowdfunding is the collection of finance to sustain an initiative from a large pool of backers—the “crowd”—usually made online by means of a web platform. The initiative could be a nonprofit campaign (e.g. to raise funds for a school or social service organization), a political campaign (to support a candidate or political party), a philanthropic campaign (e.g. for emergency funds for an ill person or to produce an emerging artist), a commercial campaign (e.g. to create and sell a new product) or a financing campaign for a start-up company.

Crowdfunding has its origins in the concept of crowdsourcing, which is the broader concept of an individual reaching a goal by receiving and leveraging small contributions from many parties. Crowdfunding is the application of this concept to the collection of funds through small contributions from many parties in order to finance a particular project or venture.” There are hundreds of crowdfunding web sites out there.

Do your due diligences before you engage in any crowdfunding activities and verify the track records of any crowdfunding organizations you might want to do business with. Another option is to use an alternative lender such as ACCION.  Their mission is dedicated to helping entrepreneurs and business owner’s fuel income generation, asset creation, employment opportunities and financial success through business ownership. The organization offers business loans between $200 and $300,000 along with training, networking and other support services to those who own or want to start a business.

The Small Business Development Center can help you identify the lenders, which are the most likely to accommodate your stage of business and your situation; they can help to define your actual need for financing and your ability to repay it. Any lender will want you to show them what you are going to do to pay their money back. As with any request for funding that gets turned down, find out the reason why you were turned down (undercapitalization, inability to payback, that particular bank does not loan to start-ups or make loans to the industry you are operating in). See if you can fix the reason for the denied loan application and resubmit.

-M&M

To ask your questions: Call the Small Business Development Center(SBDC) at Cochise College (520)-515-5478 or email schmittm@cochise.edu or contact the Sierra Vista Economic Development Foundation (EDF) at 520-458-6948 or email  hollism@svedf.org.

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